Malella-Based Recovery Action Proceeds & Discovery of Financial Documents Granted

NO-FAULT – FRAUDULENT INCORPORATION – COMMON-LAW FRAUD & UNJUST ENRICHMENT CLAIMS – SUMMARY JUDGMENT – DISCOVERY OF FINANCIAL DOCUMENTS
One Beacon Ins. Group, LLC v. Midland Med. Care, P.C.
(2nd Dept., decided 9/9/2008)

OneBeacon brought this action against numerous medical PCs, management companies and the individuals who owned them, and licensed healthcare professionals, alleging that the PCs were fraudulently incorporated in the names of licensed healthcare professionals while, in fact, the PCs were owned, operated, and controlled by unlicensed persons and their management companies in violation of applicable statutes and regulations. Under theories of common-law fraud and unjust enrichment, OneBeacon sought recovery of no-fault bills already paid to the PC defendants, as well as a declaration that it was not obligated to pay outstanding claims.

Defendants David Stemerman and his radiology practice, Proscan Imaging, P.C. moved for summary judgment to dismiss OneBeacon's complaint, which was denied, Nassau Supreme finding a triable issue of fact to exist as to whether Proscan was fraudulently incorporated, and ordering those defendants' disclosure of certain financial documents to OneBeacon.

In AFFIRMING the lower court's order, the Second Department pointed out:

Applicable provisions of the no-fault law require insurers to reimburse patients or their medical provider assignees for "basic economic loss" (Insurance Law § 5102[a][1]). A provider of healthcare services is not eligible for reimbursement, however, "if the provider fails to meet any applicable New York State or local licensing requirement necessary to perform such service in New York" (11 NYCRR 65-3.16[a][12]). The Court of Appeals has interpreted 11 NYCRR 65-3.16(a)(12) to allow insurance carriers to withhold reimbursement for no-fault claims from fraudulently licensed medical corporations and to "look beyond the face of licensing documents to identify willful and material failure to abide by state and local law" (State Farm Mut. Auto. Ins. Co. v Mallela, 4 NY3d 313, 321). State law mandates that professional service corporations be owned and controlled only by licensed professionals (see Business Corporation Law §§ 1503[a]; 1507, 1508), and that licensed professionals render the services provided by such corporations (see Business Corporation Law § 1504[a]).

In the Second Department's view, although the appealing defendants had shown their entitlement to summary judgment by by submitting evidence that Stemerman, a licensed physician, was the sole shareholder of Proscan, performed or oversaw all medical services provided by Proscan, and was the sole signatory on Proscan's bank account, OneBeacon had submitted sufficient evidentiary proof to raise an issue of fact as to whether Proscan was actually controlled by a management company owned by unlicensed individuals in violation of the New York Business Corporation Law.

On the discovery dispute, the Second Department ruled that Nassau Supreme had properly granted that branch of OneBeaon's cross motion for disclosure of certain financial documents:

Contrary to the appellants' contention, the plaintiffs were not required to make a showing of "good cause" for such disclosure (State Farm Mut. Auto. Ins. Co. v Mallela, 4 NY3d at 322; see Matter of Andrew Carothers, M.D., P.C. v Insurance Cos., 13 Misc 3d 970, 972-973), as the documents were "material and necessary in the prosecution" of this action (see CPLR 3101[a]).